Conference Call      
          Dr.Reddy's Laboratories
Expects better second half on 180 days exclusivity for Olanzapine and new orders


Dr.Reddy's Laboratories declared financial results for the quarter ended September 2011 and held a conference call on 25th October 2011 to discuss the results and its future growth strategies. The key takeaways of the call are as follows

Highlights of the call:
Revenues booked at the average rate USD conversion rate of Rs 45.80 and receivables booked at closing rate i.e at Rs 49.05.
Net sales grew by 21% to Rs 2267.79 crore for the quarter ended September 2011, led by robust 34% growth in PSAI (Pharmaceutical Services and Active Ingredients) business to Rs 717.67 crore.
The gross margins improved by 40 basis points on the back of favorable business mix, resulting in 22% growth in gross profit to Rs 1220.45 crore.
The Selling, General & Administration (SG&A) expenses (including amortization) increased by 26% to Rs 721.58 crore for the quarter ended September 2011. This increase is on account of a) higher freight costs both on account of increase in sales volumes as well as rate increases, b) inflation and annual increase in manpower costs across businesses, c) incremental costs at Bristol and Shreveport manufacturing facilities in the US and d) the increase in the OTC-related selling and marketing costs in Russia and other CIS markets as compared to previous year.

Generics Business:
Revenues from Global generics business grew by 18% to Rs 1613.57 crore for the quarter ended September 2011, mainly driven by the North America and Russia business contributing 67% to the total sales
Revenues from North America grew by robust 42% to Rs 628.7 crore for the quarter ended September 2011, on the back of new product launches in the last twelve months and market share improvement in key products.
During the quarter, 24 prescription products among the Top 3 ranks in market shares. Also, 5 new products launched including limited competition products of fondaparinux & fexofenadine pseudoephedrine D24 OTC in North America Market.
Revenues from Russia & Other CIS markets grew by strong 23% to Rs 338 crore for the quarter ended September 2011, largely driven by volume growth in key brands in the Russian market. During the quarter, the other CIS markets growth remained flat at Rs 47.7 crore.
The growth in Russia driven by volume increase across key products Nise, Cetrine, Ciprolet, Omez & Keterol. OTC portfolio witnessed 33% YoY growth representing 25% of sales. According to MAT August 2011, the company's Secondary sales grew by 20% vs Industry growth of 10%. As a result, its market rank improved to12th from 13th in previous quarter.
Revenues from India grew by 9% to Rs 345.9 crore for the quarter ended September 2011, largely driven by new product launches and volume growth in key products such as Omez, Stamlo & Razo. Further, the biosimilars portfolio witnessed 22% YoY growth representing 6% of overall sales.
The Company launched 3 new products in domestic market during the quarter.
Revenues from Europe declined by 11% to Rs 211.7 crore for the quarter ended September 2011, primarily on the back of 27% fall in revenues to Rs 120 crore from the Germany market due to the continuing tender pricing pressure. The AOK tender supplies are challenging due to low margins
Revenues from Rest of Europe grew by 26% to Rs 93.3 crore in Q2 FY12 mainly driven by new launches in UK and growth in out-licensing business.
RoW markets declined by 8% to Rs 89.3 crore for the quarter ended September 2011.

PSAI business
Revenues from PSAI business grew by robust 34% to Rs 717.67 crore for the quarter ended September 2011, on the back of strong growth in Active Ingredients business led by new product launches in Europe and Pharmaceutical Services business on account of improved customer order book status.
Adjusted EBITDA grew by 20% to Rs 510 crore (USD104 million) for the quarter ended September 2011. The adjustments includes benefit from a part reversal of provision booked in Q1'FY 12 for Voluntary Retirement Scheme (VRS) floated by the company.
Adjusted PAT grew by 8% to Rs 310 crore (USD 63 million) for the quarter ended September 2011. The adjustments include: a) interest on bonus debentures and b) benefit from a part reversal of provision booked in Q1'FY 12 on account of Voluntary Retirement Scheme (VRS) floated by the company.
It has launched Olanzapine 20 mg tablets (Generic Zyprexa) in the US market and been awarded a 180-day and Teva got the exclusivity for 2.5 mg, 5 mg, 7.5 mg, 10 mg and 15 mg strengths for the same product. Interestingly, Olanzapine 20 mg tablets have market size of USD 360 million. Further, Annual sales of Zyprexa were approximately USD 3.2 billion in the United States as of September 2011, based on IMS sales data.
During the quarter, it has launched 28 new generic products and filed 17 new product registrations and filed 11 DMFs globally.
The market share of lansoprazole and omneprazole is 20% each and fondapraniux is at 10%.
During the quarter, it has filed 4 ANDA's taking the cumulative filings to 177 out of which 76 are pending approvals, Para IVs are 40 and FTFs are 11.
It has also filed 11 DMF during the quarter (2 in US, 1 in Canada, 2 in Europe & 6 in other markets) taking the cumulative DMFs to 506 (176 in US, 141 in Europe, 62 in Canada & 127 in RoW).
In Biosimilars space, the first generic launches in India are rituximab, darbepoetin alfa & pegylated GCSF. Further, Rituximab picking up well from the last year. Moreover, In Proprietary Products, the terbinafine pregresses into Phase III
The Government of India withdrew DEPB scheme by the end of 30th September 2011, but to lessen the adverse impact, it has revamped the duty drawback scheme. The DEPB impact was originally estimated at Rs 100 crore but after the new duty draw back scheme was introduced, the adverse impact is estimated to have come down to Rs 50-60 crore. This new regime impact started during the quarter.
The Capex is at Rs 360 crore (USD 73 million) for H1 FY12.
The tax rate expected to be 17% for the FY'12 on base business. With the Olanzapine it could be in the range of 18-20% for the FY'12.
It expects R&D investments to scale-up significantly in H2 FY12. Further, the management insisted that due to the higher competition in the generic market it want to concentrate more on the higher complex generics this results in the higher R&D investments.
The Company expects higher growth second half of the FY'12, on the back of new launches (including 180 days exclusivity of Olanzapine) and new customer orders in Shreveport and scale-up in Bristol launches.
Consolidated Debt is at Rs 3130.3 crore as on 30th September 2011, compared to Rs 2394 crore as 30th June 2011. Further, Cash and Cash Equivalents is at Rs 759.6 crore as on 30th September 2011, compared to Rs 546.8 crore as on 30th June 2011. The rise in debt was largely on account of Rupee depreciation.
The Net Debt to Equity ratio at 0.49 as 30th September 2011 compared 0.38 as on 30th June 11.